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Is Gold a Good Hedge Against Inflation?
By Bianca Rodríguez Rojas MONEY RESEARCH COLLECTIVE
It’s natural to consider investing in gold as a hedge against inflation, especially when the price of goods goes up and average wages stagnate. This is partly because, unlike stocks or bonds, gold is a tangible asset and owning a physical object offers a sense of security.
However, while gold may seem like a dependable hedge, there are also downsides to this asset.
To learn more about whether gold is the right hedge against inflation for you, keep reading for a detailed look at its pros, cons and alternative investment options. Do note, the best way of knowing if gold is a good hedge against inflation for you is by talking to your financial advisor.
Table of Contents
- Benefits of buying gold
- Downsides of buying gold
- Investment alternatives to gold
Benefits of buying gold
In times of inflation, investors buy gold and other precious metals because these are stable, reliable assets you can buy, sell or trade anywhere in the world. This helps gold buyers protect the purchasing power of their dollars. While other investments are vulnerable to market changes, gold has historically retained its value.
Here’s a breakdown of three benefits of buying gold:
- Global asset – Gold is a tangible asset recognized worldwide, which means access to more markets where you can buy, sell, or trade it. Additionally, because gold isn’t tied to any country’s currency or economy, it retains its value across different regions and markets. This makes it easier for investors to access funds quickly or modify their investment as markets ebb and flow.
- Safe haven – Gold is seen as a safe investment in times of economic, political or global crises. These crises often create market volatility that affects the values of treasury bonds, investment funds and even 401(K)s, among other investments. Gold then becomes a way for investors to diversify their portfolios to protect investments from market fluctuations.
- Gains value when the dollar is weak – When the dollar depreciates, it takes more dollars to purchase the same amount of gold. If you buy gold when the dollar is strong, you’ll likely pay a low price. When inflation goes up and the dollar weakens, your return on investment will increase. This strategy uses gold as a hedge against inflation and economic instability.
Downsides of buying gold
As with most things, there are also drawbacks to investing in this precious metal.
- It doesn’t yield interest or pay dividends – Gold, unlike stocks or treasuries, doesn’t generate returns in the form of interests or dividends. This means it can only serve as a hedge against inflation if you sell gold at a higher price than you paid to purchase.
- Storage and insurance costs – When you invest in physical gold, you’ll need to also invest in how to store it. Whether you buy a safe for your home, pay for a safety deposit box at a bank or hire a service that specializes in storing precious metals, costs will add up. This is something to take into account before investing in gold.
- Limited long-term growth – Gold doesn’t provide long-term growth like investments such as stocks or real estate. It may provide a hedge against inflation, but its value doesn’t experience steady growth over time. It’s less effective for investors focused on building wealth over the long term because it doesn’t offer consistent growth, similar to a regular savings account.
Investment alternatives to gold
Gold may be a popular way to safeguard some of your assets from inflation, but here are other alternatives to consider:
- Treasury Inflation-Protected Securities (TIPS) – These federally-backed securities offer a low-risk investment to protect assets during inflation. Their principal value adjusts based on changes in the Consumer Price Index (CPI), so their value increases when inflation rises.
- Real estate – Real estate can be a strong investment during inflation as it often causes property value to increase. Owning real estate to rent it out can generate a consistent stream of income in the short term, while increasing in value over time.
- Exchange-Traded Funds (ETFs) – ETFs are a type of investment fund made up of a mix of different assets, which you can buy or sell like regular stocks. It serves as a hedge against inflation because ETFs provide a diversified portfolio of assets that aren’t impacted heavily by inflation. This diversification helps investors spread risk, which allows them to retain value while prices rise. There are even gold ETFs which allow you to invest in gold, without having to purchase an actual piece of the metal.